Good morning and welcome to the Cogent Communications Holdings Fourth Quarter and Full Year 2018 Earnings Conference Call. As a reminder, this conference call is being recorded and it will be available for replay at www.cogentco.com. I would now like to turn the call over to Mr. Dave Schaeffer, Chairman and Chief Executive Officer of Cogent Communications Holdings. Sir?

Thank you and good morning to everyone. Welcome to our fourth quarter and year end 2018 earnings conference call. I am Dave Schaeffer, Cogent’s Chief Executive Officer and with me on this morning’s call is Tad Weed, our CFO. We are pleased with our results for the quarter and for the year and continue to be optimistic about the underlying strength of our business and our outlook for 2019 and beyond. Our EBITDA margin for the year increased by 230 basis points to 35.5% from full year 2017, representing our highest annual EBITDA margin percentage in our 19-year history. Our EBITDA for the full year increased by $23.2 million, which is an increase of 14.4% from full year 2017. Our gross margin for the full year of 2018 increased by 100 basis points from full year 2017 to 58.0%. On a constant currency basis, we achieved quarterly revenue growth sequentially of 1.8% and year-over-year revenue growth of 6.2%. Our quarterly sales rep productivity remains above our long-term average at 5.7 units per full-time equivalent rep which is significantly above the 5.1 long-term average per FTE. Our year-over-year quarterly traffic growth was 44% and we achieved sequential traffic growth on our network of 10%. For the year, our traffic growth accelerated full year from 27% last year to 43% for full year 2018 over full year 2017. During the quarter, we returned $26.5 million to our shareholders through our regular quarterly dividend program. As posted on our website, 55% of our $97.9 million of total dividends for 2018 should be treated by shareholders as a return of capital and 45% should be treated as taxable dividends for U.S. federal tax purposes. During the quarter, we also purchased 148,000 shares of our common stock for a cost of $6.6 million at an…

Thank you, Dave and good morning everyone. This earnings conference call includes forward-looking statements. These forward-looking statements are based upon our current intent, belief and expectations. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. Please refer to our SEC filings for more information on the factors that could cause actual results to differ. Cogent undertakes no obligation to update or revise forward-looking statements. If we use any non-GAAP financial measures during this call, you will find these reconciled to the GAAP measurement in our earnings release, which is posted on our website at cogentco.com. I’ll turn the call back over to Dave.

Hey, thanks, Tad. Hopefully, you have had a chance to review our earnings press release. Our earnings press release includes a number of historical metrics reported on a consistent basis. Now for a few words about expectations against long-term our guidance targets. Our Corporate business, which represents approximately two-thirds of our revenue for full year 2018, has been growing within our targeted guidance range for long-term revenue growth of between 10% and 20%. And in fact, it grew at 11.8% full year 2018 over full year 2017. However, our NetCentric business has been underperforming, and until that business recovers to its historical long-term growth rates, we are revising our long-term full year revenue growth target to 10%. Our long-term EBITDA annual margin expansion targeted guidance is an annual improvement of approximately 200 basis points. For full year 2018 we exceeded our EBITDA margin annual targeted guidance growth and we achieved annual EBITDA margin expansion of 230 basis points. Our cash flow, as defined by EBITDA minus CapEx, minus principal payments on our capital leases, grew by 19.2% full year 2018 over full year 2017. Due to the excellent operating leverage in our business, we expect this rate of cash flow growth to continue at similar rates in the future. Our revenue and EBITDA guidance targets are intended to be multiyear goals and are not meant to be used as specific quarterly or annual guidance. Tad will now cover some additional details relating to the results for our quarter and full year.

Thanks again, Dave, and again good morning to everyone. I’d also like to thank and congratulate our entire Cogent team for their results and continued hard work and efforts during another very busy and very productive quarter and year for Cogent. Some comments on revenues by Corporate and NetCentric and customer connections. We analyze our revenues based upon network type, which is on-net, off-net and non-core, and we also analyze our revenues based upon customer type. And we classify all of our customers into two types, NetCentric customers and corporate customers. Our NetCentric customers buy large amounts of bandwidth from us and carrier neutral data centers and our corporate customers buy bandwidth from us in large multi-tenant office buildings. Revenue from our corporate customers for the quarter grew sequentially by 2.8% to $87.9 million and grew year-over-year by 11.7% for the quarter. Revenue for our corporate customers was $337.8 million for the full year, which was an increase, as Dave mentioned, of 11.8% over full year 2017. We had 45,189 corporate customer connections on our network at quarter end, which represented an increase of 18.9% over 2017. Quarterly revenue from our NetCentric customers declined sequentially by 1% to 44.1 million and declined year-over-year by 5.1% for the quarter. Revenue from our NetCentric customers was $182.3 million for full year 2018 which was a decrease of 0.4% over full year 2017. We had 34,917 NetCentric customer connections on our network at quarter end, which was an increase of 3.9% over full year 2017. Our NetCentric revenue growth experiences significant more volatility than our corporate revenues due to the impact of foreign exchange, the size of those customers and other certain seasonal factors. Comments on revenue and customer connections by network type, our on-net revenue was $95.4 million for the quarter. That…

Hey, thanks Tad. I’d like to take a moment and comment on the scale and scope of our network and its expansion. We have over 944 million square feet of multi-tenant office space in North America, directly on our network. We added 170 buildings to our network in 2018. Our network consists of 32,900 metro fiber miles and over 57,400 intercity route miles of fiber. The Cogent network remains the most interconnected network in the world and we have direct connectivity with over 6,580 networks, which less than 30 of these networks are settlement free peers, the remaining networks are all Cogent transit customers. We are currently utilizing approximately 31% of the lit capacity in our network. We routinely augment segments of the network to maintain these low utilization rates. For the quarter we achieved sequential traffic growth of 10%. And on a year-over-year basis, our traffic grew by 44% in the quarter. We operate 52 of our own data centers, which comprise 587,000 feet of raised-floor space and are today operating at approximately 32% utilization. Our sales force turnover was approximately 5% in the quarter, which is better than our long-term sales force turnover rate of monthly 5.7%. Our quarterly sales rep productivity as measured on a monthly basis for full time equivalents was 5.7 installed orders per rep per month. This is above our long-term average of 5.1 orders installed per full time equivalent rep per month. We ended the quarter with 487 sales reps selling our services, which is a significant increase from the 453 reps that we had at the end of Q3 and the most number of sales reps selling our services we’ve had in our corporate history. In summary, Cogent is a low cost provider of internet services, transit services and our value proposition…

Thank you. [Operator Instructions] And our first question comes from Colby Synesael with Cowen & Company. Your line is open.

Great. Thanks for taking the question. This is John on for Colby. How much has your view on the long term growth potential for the NetCentric business changed since last quarter, especially given the tweak to your growth targets of 10% now? And how should we be thinking about the growth or trends within that business over the next couple of quarters? Thank you.

Yes. So, I think our long-term view is that NetCentric business will continue to improve and return to its long-term average growth rate of about 9.5% year-over-year. As I mentioned in the last call and have repeated at multiple interactions with investors that business has continued to underperform for a number of reasons. While traffic growth has accelerated, revenue growth has lagged. On a full year basis, revenues were down 4/10 of a percent. If you FX adjust that, they were up 2.6% 2018 over 2017, which is substantial with lower growth rate than the 9.5% long term average. Based on the slower rate of recovery in that business, it made sense for us to revise our long-term growth rate to be realistic about the amount of time it’s going to take for that business to recover. But our ultimate view is traffic growth will continue to accelerate, price declines will be at historical average rates, about 23% per year and Cogent will continue to gain market share, growing about twice as fast as the market. So, with those parameters, we do expect to eventually return to NetCentric growth in that 9% to 10% range. And therefore, our total growth rate will be back in the 10% to 20% range. But due to the fact that we do not have visibility to when that will occur, it seemed prudent to reduce the total business’ revenue growth target to 10%, which is still substantially better than any other wireline telecom service provider who is growing organically globally.

Great thank you.

Our next question comes from Matthew Niknam with Deutsche Bank. Your line is open.

Hi guys. This is Benjamin on for Matt. Thanks for taking the question. Just one quick one on the sales force. So, you guys noted that there was lower churn this quarter and we also saw sort of the highest net additions there that we have in a while. Just want to dig in there and see if there’s anything to call out around, is this lower churn a trend, has your strategy changed around how many people you want to add, just anything in there? Thanks.

Yes. So, we remain pleased with the initiatives that we’ve put in place and continue to enhance on the sales force. As we’ve spoken about with investors in the past, we have implemented a much more formalized and rigorous training program that has allowed us to reduce churn. We have experienced lower sales force turnover over the last several quarters and continue to see the ability to improve that number even further. In terms of total number of sales people, we expect to grow the sales force somewhere between 7% and 10% annually. We achieved that ‘17 over ‘18 and we expect similar type aggregate growth in the sales force in 2019 versus 2018. To help facilitate that, we continue to open additional sales offices. Recently we bought opened offices in Columbus, Ohio, Singapore and in Montreal to augment the footprint that we have in place. And then finally, we think that the training efforts that we have put in place had been responsible for enhanced sales force productivity. And our rep productivity at 5.7 orders per full time equivalent rep per month installed continues to be substantially above our on long term average. So, it is this improvement in both the size of the sales force and the efficiency of the sales force that gives us confidence that our aggregate business will continue to grow and our operating margins will continue to improve and therefore, our ability to grow cash flow at nearly 20% and therefore grow the dividend at a similar rate.

Great thanks.

Our next question comes from Frank Louthan with Raymond James. Your line is open.

Yes, can you just give us an update on the sales force progression in the NetCentric business? Where you think where do you expect that to be over the next 12 months? And is there anything changed in sort of your hiring and so forth with how you’ve done that organization?

Yes. Hi, Frank. So today we have 141 of our 487 reps are NetCentric. They are effectively equally divided between North America and the rest of the world. We continue to expect to grow both the Corporate and NetCentric sales forces at about the same rate. The opening of the office in Singapore is focused purely on the NetCentric market, whereas the Columbus office is mostly focused on the retail market with limited NetCentric opportunities in that part of the country. We continue to enhance the training of both sales organizations and we feel comfortable that over the long run the NetCentric business will improve from that 2.6% year-over-year growth back to the 9.5%. We just don’t know exactly when that’s going to happen. So that was the reason for the slightly more conservative guidance targets going forward. But we think we have the right number of NetCentric reps. Their turnover is substantially lower than that of the Corporate reps, and we expect their productivity continue to remain at elevated levels just as we’re saying from the entire sales force.

So, what is sort of the trick then to get it back up? I mean, you’ve tweaked around a little bit with sort of their focus and is it or is it focusing more on web-scale providers and things like that. What exactly do you think it’s going to take to get that growth right back up? So, it’s a pretty big job.

Sure. So, a couple of points, Frank, first of all, the unit growth has already reaccelerated. The traffic growth numbers have reaccelerated. What we have seen, however, is over the past year most of that unit growth has come from our largest customers, which get the lowest price point. It has been that lower priced traffic that has retarded our revenue growth rate. We believe that is a temporary phenomenon for 2 reasons. One, some of our NetCentric customers who previously had paid direct connect agreements that they were pressured into in the period of constrained ports when there were violations of net neutrality, are now able to divert that traffic back to Cogent and utilize transit as a lower cost and easier to use service. Secondly, we have seen organic growth rates of the larger web centric customers, hyperscale providers outpace that of the general market. I think that is a more transitory phenomena and we would expect that over the next year or 2, the market growth rates of both large and small customers to homogenize and become equivalent, whereas today, we are seeing a disproportionate growth from our largest customers. So, there’s actually nothing wrong with the NetCentric sales efficiency and efficacy. The issue is to actually selling to big costumers, which is depressing the effective price per megabit. And we think that’s a temporary phenomenon.

Okay thank you very much.

Our next question comes from Nick Del Deo with MoffettNathanson. Your line is open.

Hi good morning. Thanks for taking my questions. First Dave, as you noted in your prepared remarks, you had really strong margin expansion in 2018, again despite revenue growth coming in a bit shy of your goals. It seemed to be mostly driven by SG&A controls. Even though SG&A leverage in Q4 was a bit lower than the first three quarters of the year. Were there any SG&A drivers that made an out sized contribution to margin expansion during the year or other drivers that we should bear in mind as we think about 2019?

So, first of all, Nick, roughly 100 basis points of our margin expansion came from COGS efficiency as our cost of goods sold continue to decline as a percentage of revenues. Our gross margins increased from 57% to 58%. We have said that over the long term that roughly 200 basis points per year of margin expansion will come almost equally from COGS efficiency and SG&A efficiency. On the SG&A part of your question, we are getting more efficacy out of the sales force. We are getting better utilization of our sales infrastructure. As the sales force grows, the management spans of control are filling out, and we all are not adding significantly to our G&A headcount. It is really all of those things that have attributed to the SG&A operating leverage in the business. So, on the network side, it’s the sale of on-net services and the high operating leverage that comes from that, the lower operating leverage, but still substantial that comes from selling off-net. And on the SG&A side, it’s really just utilizing our infrastructure more efficiently. If we look over the long term, Cogent’s EBITDA contribution margins have been 43.7%. That is actually still substantially above the 35.5% that we deliver for full year 2018. But we are also saying our contribution margins improved, and in fact for 2018, our contribution margins were about 58% which is substantially above that long-term average. We, actually, expect that to continue. And it is why even though we revised our target for total revenue growth due to the slower revenue growth on the NetCentric portion of the business, we remain confident in our ability in 2019 to deliver approximately 200 basis points of EBITDA margin expansion. We, actually, expect that to continue in the out years as well. Again, this is not short-term guidance but long term.

Got it. That’s great color. And then maybe can you give us any sort of update on your SD-WAN offering in terms of client interest and your sales funnel? And maybe have anything unexpected or interesting you have learned from a marketing or operating perspective since you launched it?

Yes. So, I think there are really 3 takeaways from our launch. The customers that have deployed have been happy with the service. 2, I think a lot of prospective customers are confused about what the technology actually can deliver, and where it is superior to our VPLS offerings. So, I would actually say that one of the big advantages of offering SD-WAN has actually been the commencement of conversations with MPLS customers who want to switch off of MPLS. And as they evaluate the 2 technologies, some of those customers have actually chosen VPLS over SD-WAN, some have chosen SD-WAN. And I think universally, what our sales force is saying is, any customer that today is operating an MPLS network is frustrated. They’re frustrated with the high cost, the lack of flexibility, and the difficulty of managing that network over the long term. So, there are about 1.3 million MPLS ports deployed in North America, and that represents close to $45 billion in spend. We think that all of that is vulnerable to replacement, and will be migrating to SD-WAN or to VPLS. I think the third point I’d like to make is, customers remain confused about what SD-WAN can deliver versus some of the promises that have been made by some of the equipment vendors. And there are a multitude of vendors in the market selling CPA equipment. And they make a number of promises or boast about their equipment that are probably not completely accurate. And a big part of the sales effort has actually been our sales force managing customer expectations and those expectations really are around throughput and feature set. And it’s a tradeoff. If you turn all of the feature sets on in terms of security, control, and multi-vendor interfaces, you then end up sacrificing throughput. If you’re focused on throughput, in many ways a VPLS solution is more mature but, we’re seeing success with both products and our VPNs delivered over both technologies continue to increase as a percentage of our revenues, and have grown from 17% to 18% of total revenues and are up from 25% to about 27% of corporate revenues.

Got it. That’s great color Dave. Thanks so much.

Hi thanks Nick.

Thank you. And I’m not showing any further questions at this time. I’d like to turn the call back over to Mr. Schaeffer for any closing remarks.

Okay. Well, first of all, I’d like to thank everyone for joining us. I know today is a busy day, and there are some other investor events going on, but we remain pleased with our performance. We’re encouraged by the cash flow generation that our business is continuing to demonstrate in a market where other wireline carriers have been struggling. And our commitment to returning increasing amounts of cash to our shareholders has been demonstrated by both our buyback and dividend increase strategy. So, I want to thank everyone. I want to thank entire Cogent team, and we’ll be talking soon.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Everyone have a wonderful day.